Monthly Archives: May 2014

Kenneth Rogoff, the creator of the fictional 90% budget deficit cliff, is back spreading new myths. He has now ventured into white-collar criminology, without the benefit of any study of criminology. The results are yet another embarrassment for Rogoff. The title of his article is “Paper money is unfit for a world of high crime and low inflation.”

I’ll leave his claim about removing the “lower bound” on central bank monetary policy to others. I note only that he ignores the readily available (and superior) alternative of fiscal policy.

President Rafael Correa of Ecuador owes a triple debt to John Williamson, the economist who coined the term “the Washington Consensus” in a paper he first presented in 1989. His paper is open about the focus of that consensus: Latin America. Latin America was to be transformed through policies on which the United States Government, the International Monetary Fund (IMF), the World Bank, and the Washington “think tanks” had reached a consensus. Those policies had four key components.

Require a sufficient stream of payments of interest by Latin American debtors to U.S. banks to ensure that the banks would not have to recognize large losses on their loans

In previous instalments we have established that “taxes drive money”. What we mean by that is that sovereign government chooses a money of account (Dollar in the USA), imposes obligations in that unit (taxes, fees, fines, tithes, tolls, or tribute), and issues the currency that can be used to “redeem” oneself in payments to the government. Currency is like the “Get Out of Jail Free” card in the game of Monopoly.

Taxes create a demand for “that which is necessary to pay taxes” (and other obligations to the state), which allows the government to purchase resources to pursue the public purpose by spending the currency.

Scott Fullwiler spent part of the afternoon reading (and reacting to) a paper that John Cochrane just gave at a conference on central banking in Stanford, CA. I haven’t read the paper yet, but judging by Scott’s reaction on Twitter, there’s lots to like about it. (Mostly because it appears to draw heavily from a broad swath of at least a decade of published work from MMTers.)

We’ll have to wait for Scott’s forthcoming post to see just how close the parallels are (and how much Cochrane 2014 departs from Cochrane 2009). It will be interesting, particularly because several years ago Cochrane wasn’t interested in garnering insight from outside the mainstream. “Every now and then,” he confessed, “there’s an excluded subgroup that turns out to be right.” But he readily admitted — nay, disparaged — “I haven’t read their specific work. I’m busy, and I try to read what is considered interesting and valid.” Being right matters, and I think that’s why MMT has begun to seep into the mainstream. The risk (though this is not how Noah sees it) is that “all the interesting heterodox ideas [will] quickly get incorporated into the mainstream in some slightly bastardized form,” leaving the discipline as a whole only marginally better off, while those who did the heavy lifting remain at the margins.

The reason we have recurrent, intensifying financial crises is because we learn the wrong lessons from our prior crises and actively make things worse. The consistent explanation for our making things worse is that dogmas lead to “doubling down” on failed faith-based policies. The dominant ideologues in the U.S. and Europe on financial policies are theoclassical economists and their fellow choir members – neoclassical economists. A small article in the Wall Street Journal provides a classic example of the continuing destruction driven by these dogmas.

The WSJ article, of course, sees none of this. It fails to distinguish between two very different concepts. The Office of the Comptroller of the Currency (OCC) is supposed to regulate “national banks” – the largest banks. The first concept is where examiners’ offices are located. The OCC uses “resident” examiners in the largest banks. This means that hundreds of OCC (and Fed) examiners have offices in the huge banks. Resident examiners are a terrible idea because they invariably “marry the natives.” When the Fed “marries the natives” it constitutes incest because the NY Fed (which examines many of the largest bank holding companies) has traditionally been one branch of the inbred Wall Street family. The OCC, under Presidents Clinton and Bush, was nearly as bad because it was engaged in a “race to the bottom” with the Office of Thrift Supervision (OTS) to see which could “triumph” as the worst federal banking regulator.

Explanation 5: Washington Consensus Climate Policy Proposals are Politically Hard to Explain, Disproportionate to the Challenge, and Underestimate Government’s Role

The frustration with Obama of many in the established green movement revolves around the assumption that if he is serious about climate, why then, they think, doesn’t Obama simply adopt or fight for their favored policy instruments or revive a version of the 2009 Waxman-Markey bill. There is an unfortunately somewhat naive and unfounded consensus among parts of the Democratic Party and in established green groups that serious climate action involves a policy centered around something like the Kyoto Protocol cap and trade system or a carbon tax. A very large body of discourse in the established climate policy milieu contains advocacy and analysis about why the US has not become a party to the Kyoto process. Additionally, there is, confusingly for outsiders, a rift between those who favor a carbon tax/fee versus those who favor an emissions trading instrument (cap and trade). While U.S. politicians, especially the reality-challenged Republican Party, are currently shying away from any meaningful climate policy for largely the wrong reasons, climate policy is not the well-defined choice and proven path that green groups and many left-of-center Democrats would like politicians and the public to believe that it is.

I spent today in Washington, DC presenting and attending a conference put together by Ralph Nader on left-right convergence. The theme was that there were many issues on which large elements of the left and right agreed and could change existing policies if they worked together. I spoke about the desirability of effective financial regulation to break the Gresham’s dynamic and prevent or at least minimize the damage of future financial crises and the desirability of prosecuting the elites that run financial “control frauds.”

With the Obama Administration recently publishing a frightening report on the effects of climate change, the National Climate Assessment 2014, contradictions in Obama’s orientation on climate and energy are placed in higher relief. As part of the publication of the NCA2014, Obama took the time to meet with regional weathermen to discuss the contents of the report. Apparently, Obama did not think or did not want the public to think of him and his Administration as lightly skimming over the dire warnings in the report as an afterthought.

In the meantime, we have experienced a pivotal moment in the discovery of the present and future effects of climate change, with current ice melting patterns ensuring with a high degree of certainty that the West Antarctic Ice shelf will detach and deliver anywhere from 1 to 3 meters rise in sea levels over a 200 to 500 year period or perhaps sooner. So, talk of rising seas is, to those who heed the science, given much greater weight. No one has worked out the policy implications of this still relatively distant future event, except that adaptation to climate change in or migration from the world’s very populous low-lying areas becomes a more concrete reality.

In a rational world the Office of Management and Budget (OMB), under Presidents Bush and Obama, would have responded to the financial crisis by demanding an emergency effort as a top national priority to develop superb regulatory capacity in the financial sphere and in many other fields. Regular readers will recall the questions I emphasize we must answer – why do we suffer recurrent, intensifying financial crises? That may sound like one question, but it asks multiple questions. The two most critical are:

What is causing our financial crises?

Why are we failing to learn the correct lessons from the crises and instead making finance ever more criminogenic?

I’ve been blogging a series on the role of taxes. In the first piece, I argued that “taxes drive money”, in response to a silly claim that MMT argues we do not need taxes. In the second instalment I examined other uses for taxes—including to reduce excessive aggregate demand and to discourage “sin”. Most importantly, I argued that we do not need taxes to “pay for” sovereign government spending. In the third piece, I argued against the “Robin Hood” view that we need taxes to “take from the rich to give to the poor”. That should be obvious—we can spend on the poor without any tax increase, and indeed could spend on the poor while reducing everyone’s taxes.